Is Harmony Biosciences Holdings (NASDAQ:HRMY) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Harmony Biosciences Holdings, Inc. (NASDAQ:HRMY) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Harmony Biosciences Holdings

How Much Debt Does Harmony Biosciences Holdings Carry?

The image below, which you can click on for greater detail, shows that Harmony Biosciences Holdings had debt of US$182.8m at the end of September 2024, a reduction from US$197.1m over a year. However, its balance sheet shows it holds US$410.5m in cash, so it actually has US$227.6m net cash.

A Look At Harmony Biosciences Holdings' Liabilities

The latest balance sheet data shows that Harmony Biosciences Holdings had liabilities of US$161.3m due within a year, and liabilities of US$170.1m falling due after that. Offsetting this, it had US$410.5m in cash and US$81.5m in receivables that were due within 12 months. So it actually has US$160.6m more liquid assets than total liabilities.

This surplus suggests that Harmony Biosciences Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Harmony Biosciences Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Harmony Biosciences Holdings has seen its EBIT plunge 12% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Harmony Biosciences Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Harmony Biosciences Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Harmony Biosciences Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Harmony Biosciences Holdings has US$227.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$195m, being 101% of its EBIT. So we don't think Harmony Biosciences Holdings's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Harmony Biosciences Holdings that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.